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Like prisoners on death row, everyone knew this day would eventually come. That didn’t make it any more pleasant when Warden Bernanke showed up at our cell door with a Bible.

With the mere mention of easing on the Easing, the scaffold dropped, and we plunged into a strange new world: a landscape of rising interest rates. Interest rates had been falling for, um, 32 years. Falling interest rates are all most investors alive today have experienced.

By June 24th, interest rates on the benchmark 10-year Treasury note had risen 56%.

Some of the hardest-hit asset classes initially were bonds and “bond-substitutes.” Since the Fed had been starving anyone holding cash with a negative 2%-3% real return, senior citizens were forced to “reach for yield” to meet their basic living expenses. Unfortunately, the cheese they reached for was sitting in a mousetrap.

Inflation-protected bonds (TIPS), widely recommended for seniors due to their supposed safety, fell 9% in less than two months. Astonishingly, there are still experts who recommend that TIPs comprise the entirety of a retiree’s portfolio. Long term Treasuries fell 10% over this same period. High yield bonds went down 7%. Real estate investment trusts fell 13%. Utilities went down 11%. Everyone’s favorite flavor of the month, emerging market bonds, lost 14%. Remember how these were supposed to be even safer than bonds from developed countries? We don’t yet know exactly what skyrocketing mortgage rates will do to the overhyped housing recovery, but my guess is that they won’t exactly help.

In short, all the markets went off the rails until the Fed responded with its “just kidding” press barrage at the end of June.

What have we learned?

A little history might be instructive. Our first chart shows long-term interest rates in the US since 1871, courtesy of Robert Shiller:

The takeaway here is the long-range sine wave. These rising or falling interest rate environments historically have lasted in the range of 20 or 30 years. Including:

a falling interest rate environment from the end of the Civil War until 1902

a rising interest rate environment until the end of post-World War I inflation, around 1921

a falling interest rate environment through the Great Depression until the end of World War II

a rising interest rate environment through midcentury culminating in the inflation of the 1970s

a falling interest rate environment from 1981 right through May 2013.

During our most recent experience, from 1981 to mid-2013, interest rates fell from 15% to below 2%. The next chart shows the value of a dollar invested in the stock market (S&P 500) and the bond market (long-term Treasuries) over this period:

Source: Robert Shiller

A dollar in stocks grew to $12 after inflation, while a dollar in long-term bonds went to $11. It wasn’t all peaches and herb, and some of us can even remember a recession or two along the way, but on balance, bliss was it in that dawn to be alive.

Our final chart shows the last mega rising interest rate environment. This one serves up the postwar expansion on toast.

Source: Robert Shiller

The journey of long-term rates begins at 2.2% in 1946 and ends at twenty-six years later at 6.4% (green line). A dollar plugged into the S&P 500 at the beginning grew to $9 after inflation (blue line). The dollar you put in long-term Treasuries? This time it was only worth $0.70 at the end (the red line), paying a real -30% return over a quarter of a century.

If you paid $100 for a bond that pays you 1% interest today, and tomorrow people can buy an identical bond that pays 2% interest, your bond is now worth…$50. Why would anyone pay more for the same $1 coupon? This example is oversimplified, but that’s the idea. If, as is common, you owned the entire US bond market via an index fund, a one percentage point rise in interest rates would cause the value of your fund to fall between 5% and 6%. This is why the bond market hates a rising interest rate environment. In a falling interest rate environment, a manager who takes a little more risk than the bond market as a whole becomes a “Bond King.” In a rising interest rate environment, he becomes the Forgotten Man.

What can we anticipate?

Hegel said that the only thing we learn from history is that we learn nothing from history. Clearly, Hegel was not in the bond market. The recent rise in interest rates is worrisome because it is potentially double-barreled. Part one would be the transition from the Fed-transfused zombie rate to one that is priced by market forces of supply and demand. Part deux would be a further rise based on historical regression to its long-term mean (say, 5% or 6%). The trajectory seems bankable, but when all this will happen is anyone’s guess, and of course there are costs to being early or late.

The "taper" announcement was a shot across the bow. Investors are weighing how much interest rate exposure lurks in their portfolios and taking corrective action. This explains all those trucks rumbling past your house every night loaded with bonds destined for the landfill.

If in fact we have entered a secular rising interest rate environment, the following table could be our pocket investment guide to the next 20-30 years. It looks at every month between 1926 and 2013, and tallies the average monthly inflation-adjusted return for three asset classes, depending on whether interest rates rose or fell during the month.

Like Sisyphus, we enjoy the downhill roll more than pushing that boulder up the interest rate mountain. Only stocks have played well with rising rates in the long run.